Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
The markets continue to frustrate most investors, professionals and amateurs alike.
I’m not familiar with the CNN Fear and Greed Index construction. I suppose it’s yet another example of an investor sentiment indicator. I am familiar with the AAII equivalent Investor Sentiment Indicator so I’ll emphasize that signal. The two signals share the same characteristics of sudden and violent sentiment shifts. Good luck on ever fully understanding the cause of these dramatic impulses.
Mark Twain famously said: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” Is that ever true in the investment world!
When looking at a recent AAII Sentiment Indicator graph and the market performance during the pictured period, all I can do is gasp. Even a highly volatile equity market does not bounce either that wildly or that frequently. This is typical investor overreaction prompted by behavioral overconfidence and demonstrating a strong behavioral recency bias. If a correlation exists, I surely don’t see it. I look at these data and it is noise to me.
But that’s just me using my eyeball as a lens to gauge patterns. The hypothesis deserves a more closer inspection. CXO Advisory Group recently completed exactly that inspection for the AAII signal. Here is a Link to their findings:
As usual, the CXO study is exhaustive. The data included in the study started in July, 1987 and ended in May, 2014. So it is current. CXO explored projections from 1 week to 26 weeks.
Their overarching conclusion is as follows: “In summary, evidence indicates that investors may be able to exploit extreme values of AAII net investor sentiment as contrarian signals, but reliable (extremely bearish sentiment) signals are rare.”
I suspect that a similar attempt to correlate the CNN Fear and Greed Indicator with equity market outcomes would suffer an analogous poor correlation coefficient result.
For years I incorporated some form of a Sentiment Signal as one factor in my attempts to project next year’s market outcome. Results were very unreliable. I annually updated my correlation hypothesis which continued to disappoint. Eventually I abandoned any Sentiment component in my formulations; in the end, I also abandoned my failed annual forecast experiments.
Some forecasts are easy pickings. As George Carlin noted: “Weather forecast for tonight: dark.” Southern California weathermen enjoy that easy pickings feature. The marketplace is not so easy. As Alan Greenspan observed: “We really can't forecast all that well, and yet we pretend that we can, but we really can't.”
I seriously doubt the utility of a Sentiment signal to project future equity market rewards. From my perspective, the data and subsequent analyses attempts have collectively failed and are conclusive. Amen. The various Sentiment Indicators yield too many false signals. There are better, but imperfect, forecasting factors like Price-to-Earnings ratios.
Here's a link to how they calculate the CNN Fear & Greed Index along with a few small interesting tidbits. In Sept 2008 (6 months before the market bottomed) the Fear & Greed Index was 12. I think that was just before the worst of the credit crisis declines in the market (Oct/Nov 2008). In Q1 2012 apparently the index showed pure greed and a pretty significant correction happened in the second quarter. It's now 3.
I seriously doubt the utility of a Sentiment signal to project future equity market rewards. From my perspective, the data and subsequent analyses attempts have collectively failed and are conclusive. Amen. The various Sentiment Indicators yield too many false signals. There are better, but imperfect, forecasting factors like Price-to-Earnings ratios. s.
Simply conversation. Was not saying it was a magnificent, flawless indicator as much as, "Hey, never seen this before."
I'm not familiar with the fund. Interesting they only have 7 stocks and these are generally megacap stocks. Some believe that megacaps do best at this point in a bull market.
I own cobyx. I am waiting for microsoft, coca cola anw walmart to implode and then cobyx will suddenly become risky. Then we will see articles connected with boxing regarding right and left hooks, how cook and bynum have lost it, and how sold fund right after the drop, some right before the drop, and how some last year because it was getting too risky. I ask all of these individuals to voice opinions right now, at least those on MFO, because i dont give a damn about what people think outside MFO.
Prior to your originating post, I had never even heard of CNN’s Fear/Greed Indicator. Although I subsequently learned something about it, I am still uncomfortable in assessing its merits and shortcomings.
Initially, I wrongly contrasted it against the AAII Sentiment Indicator. The AAII Indicator is entirely an emotionally driven investor signal; it is a pure “feelings” report. The Fear/Greed formula has a market statistically-based set of 7 inputs that reflect market strength/weakness momentum characteristics. That added rigor doesn’t automatically translate into a superior predictive tool.
CNN has not disclosed the weighting functions used to assemble their composite rating. From my perspective, the CNN Fear/Greed Indicator is still a Black Box.
Like most sentiment signals, is it a reliable contrarian’s signal generator(extreme low value means buy while extreme high value means sell)? One test is to compare its limited historical record against some equity market pricing like the S&P 500 Index.
I’m not overly impressed with the wild fluctuations displayed by the CNN Indicator. It abruptly changes from high fear measures to high greed measures in a month or less with little correlation to the market’s fundamental condition.
From the referenced article, it sure seems that the CNN formulation is a contrarian’s signal. Extreme valuations suggest some reversals, but not all. No signal is perfect. Much indicator performance scoring depends on the pre-definition of the reversal magnitude and its allowable delay timeframe. Forecasters often hide behind imprecise definitions and loose timeframes.
If I were to fully trust the CNN Fear/Greed Indicator, I would buy stocks immediately; the scoring can’t be more action definitive. Nope! That’s not in my strategy book. At bottom, I simply do not trust any of the directional signals that flood the market literature with unproven, untested and unreliable forecasts. For now, I’ll just stay the course.
Thank you for introducing me to this CNN formulation. I understand that it is for informational purposes only, and does not reflect your interpretation or use of the referenced tool.
CNN has not disclosed the weighting functions used to assemble their composite rating. From my perspective, the CNN Fear/Greed Indicator is still a Black Box..
Towards the middle of the page they have the elements that make up the index.
With MJG trading/investing is all science and no art. Most likely because he comes from an engineering background. I can't fault him for that. But for others though it's almost all art. Back in the days, it was a whole bevy of sentiment indicators and only sentiment indicators and my interpretation of them that eventually turned me from zeroaire to millionaire trader. In my first 19 years the fundamentals and technicals got me nowhere. I don't use sentiment any longer because my trading and investing has evolved to more pure unadulterated price action. Some who believe only in the science of investing would be well advised to read The Tao Jones Averages by Bennett Goodspeed.
Sorry that I was too vague on what I meant by "weighting functions".
I now know that the CNN Indicator has 7 parameters that contribute to the total fear/greed score. But how many maximum points of the 100 total are assigned to each parameter?
For example, does parameter "A" get 40 possible points and the other 6 only get 10 points each or are all granted an equal maximum point assignment?
If this stock market tanks I think I will be worried about my job too. With so much noise out there, it is hard to tell whether economy is doing well or not. Warren Buffett seems to think it is, but he has lived his life and 25B instead of 50B does not matter to him if he is wrong. Everyone has to be right and wrong once in their lifetime. If Buffett has never been wrong, he will be once...
Comments
Regards,
Ted
Perhaps the pull back is healthy for market.
Stop the froth talk.
Anything but irrational exuberance at this point.
Are folks reaching for yield regardless of risk?
I don't see it. Not yet anyway.
It usually kicks-off earning season.
Less than a week away.
Maybe Mr. Market can take a sedative until then.
VENTURE CAPITAL SPECULATING
As of 2Q, COBYX is holding 37% cash.
As of 10/2, it's 5.25% for YTD.
If you have not visited their website in a while, it gets better and better...
http://www.cookandbynum.com/
The markets continue to frustrate most investors, professionals and amateurs alike.
I’m not familiar with the CNN Fear and Greed Index construction. I suppose it’s yet another example of an investor sentiment indicator. I am familiar with the AAII equivalent Investor Sentiment Indicator so I’ll emphasize that signal. The two signals share the same characteristics of sudden and violent sentiment shifts. Good luck on ever fully understanding the cause of these dramatic impulses.
Mark Twain famously said: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” Is that ever true in the investment world!
When looking at a recent AAII Sentiment Indicator graph and the market performance during the pictured period, all I can do is gasp. Even a highly volatile equity market does not bounce either that wildly or that frequently. This is typical investor overreaction prompted by behavioral overconfidence and demonstrating a strong behavioral recency bias. If a correlation exists, I surely don’t see it. I look at these data and it is noise to me.
But that’s just me using my eyeball as a lens to gauge patterns. The hypothesis deserves a more closer inspection. CXO Advisory Group recently completed exactly that inspection for the AAII signal. Here is a Link to their findings:
http://www.cxoadvisory.com/22546/sentiment-indicators/aaii-investor-sentiment-as-a-stock-market-indicator/
As usual, the CXO study is exhaustive. The data included in the study started in July, 1987 and ended in May, 2014. So it is current. CXO explored projections from 1 week to 26 weeks.
Their overarching conclusion is as follows: “In summary, evidence indicates that investors may be able to exploit extreme values of AAII net investor sentiment as contrarian signals, but reliable (extremely bearish sentiment) signals are rare.”
I suspect that a similar attempt to correlate the CNN Fear and Greed Indicator with equity market outcomes would suffer an analogous poor correlation coefficient result.
For years I incorporated some form of a Sentiment Signal as one factor in my attempts to project next year’s market outcome. Results were very unreliable. I annually updated my correlation hypothesis which continued to disappoint. Eventually I abandoned any Sentiment component in my formulations; in the end, I also abandoned my failed annual forecast experiments.
Some forecasts are easy pickings. As George Carlin noted: “Weather forecast for tonight: dark.” Southern California weathermen enjoy that easy pickings feature. The marketplace is not so easy. As Alan Greenspan observed: “We really can't forecast all that well, and yet we pretend that we can, but we really can't.”
I seriously doubt the utility of a Sentiment signal to project future equity market rewards. From my perspective, the data and subsequent analyses attempts have collectively failed and are conclusive. Amen. The various Sentiment Indicators yield too many false signals. There are better, but imperfect, forecasting factors like Price-to-Earnings ratios.
Best regards.
Here's a link to how they calculate the CNN Fear & Greed Index along with a few small interesting tidbits. In Sept 2008 (6 months before the market bottomed) the Fear & Greed Index was 12. I think that was just before the worst of the credit crisis declines in the market (Oct/Nov 2008). In Q1 2012 apparently the index showed pure greed and a pretty significant correction happened in the second quarter. It's now 3.
Interesting they only have 7 stocks and these are generally megacap stocks. Some believe that megacaps do best at this point in a bull market.
Now at 1 (highest level of fear.)
Prior to your originating post, I had never even heard of CNN’s Fear/Greed Indicator. Although I subsequently learned something about it, I am still uncomfortable in assessing its merits and shortcomings.
Initially, I wrongly contrasted it against the AAII Sentiment Indicator. The AAII Indicator is entirely an emotionally driven investor signal; it is a pure “feelings” report. The Fear/Greed formula has a market statistically-based set of 7 inputs that reflect market strength/weakness momentum characteristics. That added rigor doesn’t automatically translate into a superior predictive tool.
CNN has not disclosed the weighting functions used to assemble their composite rating. From my perspective, the CNN Fear/Greed Indicator is still a Black Box.
Like most sentiment signals, is it a reliable contrarian’s signal generator(extreme low value means buy while extreme high value means sell)? One test is to compare its limited historical record against some equity market pricing like the S&P 500 Index.
Here is a Link to one such comparison:
http://kirklindstrom.com/Articles/2013/0625_Fear-And-Greed-Index_vs_S&P500_Chart-History.html
I’m not overly impressed with the wild fluctuations displayed by the CNN Indicator. It abruptly changes from high fear measures to high greed measures in a month or less with little correlation to the market’s fundamental condition.
From the referenced article, it sure seems that the CNN formulation is a contrarian’s signal. Extreme valuations suggest some reversals, but not all. No signal is perfect. Much indicator performance scoring depends on the pre-definition of the reversal magnitude and its allowable delay timeframe. Forecasters often hide behind imprecise definitions and loose timeframes.
If I were to fully trust the CNN Fear/Greed Indicator, I would buy stocks immediately; the scoring can’t be more action definitive. Nope! That’s not in my strategy book. At bottom, I simply do not trust any of the directional signals that flood the market literature with unproven, untested and unreliable forecasts. For now, I’ll just stay the course.
Thank you for introducing me to this CNN formulation. I understand that it is for informational purposes only, and does not reflect your interpretation or use of the referenced tool.
Best Wishes.
Further explanation:
http://money.cnn.com/investing/about-fear-greed-tool/index.html
Sorry that I was too vague on what I meant by "weighting functions".
I now know that the CNN Indicator has 7 parameters that contribute to the total fear/greed score. But how many maximum points of the 100 total are assigned to each parameter?
For example, does parameter "A" get 40 possible points and the other 6 only get 10 points each or are all granted an equal maximum point assignment?
Sorry for the confusion.
Please continue the great market insights.
If this stock market tanks I think I will be worried about my job too. With so much noise out there, it is hard to tell whether economy is doing well or not. Warren Buffett seems to think it is, but he has lived his life and 25B instead of 50B does not matter to him if he is wrong. Everyone has to be right and wrong once in their lifetime. If Buffett has never been wrong, he will be once...